Abstract
This chapter addresses the definition of fintech and its fundamental elements: modernization, business innovation, new services and networking. It analyses the definitions provided by international bodies (FSB, G20, etc.) in order to understand their usefulness for regulatory purposes. It also highlights the role of public intervention that considers the impact of fintech on the supply and demand of credit, financial services and insurance. This assesses the supervision required to correct market failures and protect individual rights. Taking into account the most recent market trends, this chapter also considers the U.S. regulation of fintech (or rather, deregulation of the alternatives to banking), the British approach (considering Brexit) and the interest of Switzerland for establishing a regulatory haven for ‘fintechers’.
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Notes
- 1.
European Banking Federation. 2018. “The Future of the Banking Industry. Dialogue with the Banking Industry on ESCB Statistics”, Frankfurt, 16 march, where it has been represented that “Further digitisation is needed to provide better services and financing to consumers & businesses”.
- 2.
Draghi, M. 2018. “Monetary policy in the euro area”, Speech by the president of the ECB, ECB Forum on Central Banking, Sintra, 19 June, where the author highlights, “In 2017, growth in the euro area turned out stronger than we had anticipated: the annual growth rate in the fourth quarter was the fastest for a decade. But in 2018, growth has moderated and, so far, has come in below our expectations. In the latest Eurosystem staff projections, growth for 2018 has been revised down by 0.3 percentage points This has prompted some questions about the sustainability of the ongoing expansion, which is unusual at such an early stage of the cycle.”
See also Lagarde, C. 2019. “Transcript of International Monetary Fund Managing Director Christine Lagarde’s Opening Press Conference, 2019 Spring Meetings”, Washington D.C., 11 April, who begun by recalling: “I was reminded by my staff of a lovely line by Mark Twain. Bear with me.” “In the spring, I have counted 136 different kinds of weather inside of 24 hours.” “I am not suggesting that the global economy is going through the 136 different iterations, from synchronized growth, to synchronized slowdown; but it feels a little bit like that at this point in time.”
- 3.
This analysis follows my previous study on the shadow banking system, as to be the outcome of the deregulation process begun in the twentieth century, whereby my conclusion summarizes that, even if this phenomenon was aimed at reanimating the real growth of the economy and speeding up the circulation of money, the underlying idea was that a highly regulated financial market slowed down business and decreased the wellness of society. See Lemma, V. 2016. “The Shadow Banking System. Creating Transparency in the Financial Markets”. London. p. 182.
- 4.
It is worth summarize the publications that, since 2017, are sharing the results of FSB’s monitoring on fintech. The research refers, in particular, to FSB 2017. “Chair’s letter to G20 Finance Ministers and Central Bank Governors ahead of their Baden-Baden meeting”, 17 March where the following priorities have been outlined: “Transforming shadow banking into resilient market-based finance, including by addressing structural vulnerabilities in asset management; making derivatives markets safer by progressing the post-crisis reforms to over-the-counter derivatives markets and delivering coordinated guidance on central counterparty resilience, recovery and resolution; supporting full and consistent implementation of post-crisis reforms, including the development of a structured framework for post-implementation evaluation of the effects of reforms; and addressing new and emerging vulnerabilities, including misconduct risks, as well as those stemming from the decline in correspondent banking and from climate-related financial risks”.
- 5.
It is worth considering FSB. 2017. “FinTech credit. Market structure, business models and financial stability implications”. Report prepared by a Working Group established by the Committee on the Global Financial System (CGFS) and the Financial Stability Board (FSB), 22 May, whose initial remark pointed out that “FinTech credit—that is, credit activity facilitated by electronic platforms such as peer-to-peer lenders—has generated significant interest in financial markets, among policymakers and from the broader public. Yet there is significant uncertainty as to how FinTech credit markets will develop and how they will affect the nature of credit provision and the traditional banking sector”.
- 6.
The above consideration may be completed by recalling Chen, J. M. 1996. “The Last Picture Show (On the Twilight of Federal Mass Communications Regulation)”, Minnesota Law Review, Vol. 80, No. 6, who highlighted that the regulators ignored the economics of a technologically driven industry at their peril. So, in this article, the author outlines antitrust-inspired regulatory principles for designing tomorrow’s mass media markets, by considering that the emergence of gargantuan media conglomerates, each large enough to control vast amounts of programming but none powerful enough to conquer the entire industry, requires a comprehensive rethinking of mass communications and its regulation.
- 7.
This research remarks the results of Lemma, V. 2006. “Soft law e regolazione finanziaria,” Nuova giurisprudenza civile commentata, f. 11, p. 600 ff.; see also Gersen and Posner. 2008. “Soft Law”, U. of Chicago, Public Law and Legal Theory Working Paper, no. 213, where the authors clarify that soft law consist of “rules” issued by bodies that do not comply with procedural formalities necessary to give the same an “hard legal status,” but nonetheless these rules may influence the behaviour of other law-making bodies and of the public.
- 8.
It is worth adding that the current topic is addressed by European Commission’s Action Plan on how to harness the opportunities presented by technology-enabled innovation in financial services (FinTech), 8 march 2018.
- 9.
This research includes a reference to ECB 2018. “Banking Supervision publishes results of 2018 SREP”; and EBA 2014. “Guidelines on common procedures and methodologies for the supervisory review and evaluation process (SREP)”, which—drawn up pursuant to Article 107(3) of Directive 2013/36/EU—are addressed to competent authorities and are intended to promote common procedures and methodologies for the supervisory review and evaluation process (SREP) referred to in Article 97 et seq. of Directive 2013/36/EU and for assessing the organisation and treatment of risks referred to in Articles 76 to 87 of that Directive 2013/36/EU. See also EBA 2018. “Final Report. Guidelines on the revised common procedures and methodologies for the supervisory review and evaluation process (SREP) and supervisory stress testing”.
- 10.
This analysis recalls Huang, X. and Zhou, H. and Zhu, H., 2009. “A Framework for Assessing the Systemic Risk of Major Financial Institutions”. “Journal of Banking and Finance”, Vol. 33, No. 11, pp. 2036–2049; the authors propose a framework for measuring and stress testing the systemic risk for a group of major financial institutions. The authors expressly stated: “Our methodology is closely related to but in sharp contrast with the Financial Stability Assessment Program (FSAP) conducted by IMF in recent years, the Supervisory Capital Assessment Program (SCAP) implemented by the U.S. regulatory authorities earlier this year, and the European-wide stress testing program sanctioned by the Committee of European Banking Supervisors (CEBS). These supervisory stress testing programs are primarily based on confidential banking information and adopt the historical stress scenarios as adverse as in the Great Depression era. In contrast, it is possible to rely on public banking information from the financial markets and use the statistical bootstrapping method to consistently assess the downside extreme outcomes. Therefore our approach is more applicable by the private sector in measuring and managing the systemic risk exposures of large complex banking institutions.”
- 11.
In particular, EBA. 2019. “The EBA 2020 Work Programme” shows an output related to: (i) thematic reports on the monitoring of financial innovation and targeted reports on new developments; (ii) thematic reports on business model changes, and risks and opportunities from FinTech, innovative products and emerging trends; (iii) activities regarding the FinTech Knowledge Hub (workshops, round tables, seminars); (iv) delivering regulatory products and technical advice to the Commission on the topics requested, particularly those included in the Commission’s FinTech action plan; (v) supporting the forum of European Innovation Facilitators and related Activities.
- 12.
The text recalls the considerations of Allen, F and Babus, A. 2008. “Networks in Finance”, “Wharton Financial Institutions Center Working Paper” No. 08-07, who remark that “Modern financial systems exhibit a high degree of interdependence. There are different possible sources of connections between financial institutions, stemming from both the asset and the liability side of their balance sheet. For instance, banks are directly connected through mutual exposures acquired on the interbank market. Likewise, holding similar portfolios or sharing the same mass of depositors creates indirect linkages between financial institutions. Broadly understood as a collection of nodes and links between nodes, networks can be a useful representation of financial systems”.
- 13.
It is worth adding to the above considerations that Levine, R. and Lin, C. and Peng, Q. and Xie, W., 2019. “Communication within Banking Organizations and Small Business Lending”. “NBER Working Paper No. w25872”, investigated how communication within banks affects small business lending and exploits shocks to evaluate the impact of within bank communication costs on small business loans.
- 14.
It is possible to add a reference to EBA. 2019. “The EBA 2020 Work Programme”, whereby it is expressly mentioned that EBA will continue to strengthen the European Forum of Innovation Facilitators (EFIF), and will also develop thematic work on crypto assets and distributed ledger technology, and assess the potential implementation of a harmonised framework on cyber resilience testing.
- 15.
It refers to Barnett, J. 2013. “Copyright Without Creators”. “USC Law Legal Studies”. Paper No. 13-7 whereby is clarified that “copyright is justified by an alternative rationale: it supports the profit-motivated intermediaries that bear the high costs and risks involved in evaluating, distributing and marketing content in mass-cultural markets. This ‘authorless’ rationale is consistent with the intermediated structure of mature mass-cultural markets and accounts for long-standing features of copyright law that have conventionally been dismissed as mere transfers from consumers to media interests. The digital transformation of mass cultural markets, which has been accompanied in some media by a decline in production and distribution costs but no change or even an increase in screening and marketing costs, challenges and clarifies the intermediary-based rationale for copyright. Even in digitized content markets, copyright plays a critical role by enabling intermediaries to select freely from the full range of transactional structures for most efficiently bearing the costs and risks of screening, producing, distributing and marketing content to a mass audience”.
See also Krainer, R. 1999. “Banking in a Theory of the Business Cycle: A Model and Critique of the Basle Accord on Risk Based Capital Requirements for Banks”. SSRN Research Paper no. 177708.
- 16.
In addition, Cantú G. and Claessens, S. and Gambacorta, L. 2019. “How Do Bank-Specific Characteristics Affect Lending? New Evidence Based on Credit Registry Data from Latin America”. “BIS Working Paper No. 798”, which focuses on the recent changes in banking systems and how bank-specific characteristics have affected credit supply in five Latin American countries.
See also Arnaboldi, F. and Claeys, P. 2008. “Financial Innovation in Internet Banking: A Comparative Analysis” Available at SSRN 1094093.
Recently, Choi, B. 2019. “What is the Social Trade-off of Securitization? A Tale of Financial Innovation”. SSRN Research Paper no. 3440653, which conducts a macroeconomic welfare analysis of securitization in a real business cycle model with a banking sector, besides the fact that the author models securitization as an optional interbank funding channel that credibly reduces the diversion ability on borrowed funds and increases operation costs on loan assets. It shows that securitization allows banks to increase the asset size while sacrificing the rate of return per unit of assets.
- 17.
Moreover Braun, B. and Deeg, R., 2019. “Strong Firms, Weak Banks: The Financial Consequences of Germany’s Export-Led Growth Model”. SSRN research Paper no. 3395566, which shows that business lending by banks has increasingly been constrained on the demand side, reducing the power—and relevance—of banks vis-à-vis German industry.
- 18.
This path will go through all the following chapters and will be developed in the final chapter, Chap. 7. Underlying this analysis there is a clear reference to the current actions of the main regulators, that is, EBA. 2019. “The EBA 2020 Work Programme”.
- 19.
All the above recalls Zaring, D. and Bignami, F. 2016. “Comparative Law and Regulation. Understanding the Global Regulatory Process”. Northampton, MA, USA; the authors highlighted the regulatory state across the globe, focusing on American exceptionalism, EU regulation and East-Asian perspective and represents that “the domain of regulation has expanded dramatically over the past decades. In the United States, regulation—defined as rules that govern private market and social activity and that are made and enforced largely by specialized administrative agencies—has always been a prominent mode of state action. By contrast, in Europe, Latin America, and other parts of the globe, regulation has only recently become a pervasive and distinct form of government activity with the retreat of both state ownership of industry and the taxing and spending policies of the welfare state. At the same time the regulatory process has become global”.
- 20.
It is clear that self-executing customer access to banking has been opened up with the introduction of the first automated teller machines of the 1960s, the arrival of online banking and brokerage in the 1980s, and the rapid rise of mobile banking since the new millennium begun, as pointed out by Carney, M. 2017. “The Promise of FinTech—Something New Under the Sun? Speech given by the Bank of England Chair of the Financial Stability Board Deutsche Bundesbank G20 conference on Digitising finance, financial inclusion and financial literacy”, Wiesbaden 25 January.
- 21.
See FSB. 2017. “Artificial intelligence and machine learning in financial services. Market developments and financial stability implications”, 1 November, where this board highlights that “AI and machine learning tools are being used to identify new signals on price movements and to make more effective use of the vast amount of available data and market research than with current models. Machine learning tools work on the same principles as existing analytical techniques used in systematic investing. The key task is to identify signals from data on which predictions relating to price level or volatility can be made, over various time horizons, to generate higher and uncorrelated returns”.
See also Andersen, T. G., Bollerslev, T., Diebold, F. X., Labys, P., 2003. “Modeling and forecasting realized volatility”. “Econometrica”, 579–625.
- 22.
This part of the research refers to Andresen, S. 2016. “Remarks given by the Secretary General of the Financial Stability Board, at the Chatham House conference on The Banking Revolution: Global Regulatory Developments and their Industry Impact”, whereby it is represented that “in September 2008 in a building minutes from here, 4000 people at Lehman Brothers cleared their desks following the bank’s failure. Much worse was to come for millions of others, with the events at Lehman Brothers precipitating a significant economic crisis the costs of which we are still feeling today. These costs include significantly higher public debt, increased unemployment and substantial, and likely unrecoverable, output losses, particularly for advanced economies. It is with this background that the FSB was established by the G20 in 2009 to coordinate the work of national authorities and international bodies to promote financial stability at a global level”.
- 23.
See, in addition to the above, in general, Krugman, P. 2012. “End This Depression Now!”, New York for an effective review of the “economic slump” that has afflicted the US, the European Union, and many other countries in the recent years; see also Posner, R. 2009. “A Failure of Capitalism”. Cambridge. p. 41 ff. on the banking crisis of 2008 and the descent into depression.
See also Posner, R. 2007. “Economic Analysis of Law”, New York, p. 419 ff. and p. 465 ff., and Cooter, R and Ulen, T. 2008. “Law and Economics”, Boston p. 91, where there is an analysis of the key elements of transaction costs, and p. 95 ff., where the authors focus on the level of them and the appropriate legal rule.
- 24.
Let us add that Moenninghoff, S. and Wieandt, A. 2013. “The Future of Peer-to-Peer Finance”. “Zeitschrift für Betriebswirtschaftliche Forschung”, p. 466 ff. noted that “the financial risks stemming from peer-to-peer financial transactions are borne by the participants and span all major financial risk types. The effect of this risk assumption by individuals on economic growth and stability and required regulation will decide over the future of peer-to-peer finance. If it is not desirable, peer-to-peer finance requires a risk management mechanism—either funded or unfunded. The increasing use of peer-to-peer finance by institutional investors indicates a gradual movement towards funded risk management, transforming peer-to-peer platforms into institution-to-peer platforms”.
In this respect, Evans, D., 2014. “Economic Aspects of Bitcoin and Other Decentralized Public-Ledger Currency Platforms”. “University of Chicago Coase-Sandor Institute for Law & Economics Research Paper No. 685” recalled that “a number of internet-based digital currency platform based on decentralized public ledgers have started since the introduction of the blockchain concept by the founder of Bitcoin in 2008” and represented that”. “It is possible that public ledger platforms are more efficient than other alternative platforms for conducing financial transactions, but as of now the proposition is based on apples-to-oranges comparisons compounded with speculation. Competition will lead to better incentive and governance systems for public ledger platforms”.
- 25.
This analysis includes also the considerations of Angel, J. J. and Harris, L. and Spatt, C. S. 2010. “Equity Trading in the 21st Century”. “School of Business Working Paper No. FBE 09-10”; the authors suggested that “Increasing automation and the entry of new trading platforms has resulted in intense competition among trading platforms. Despite these changes, traders still face the same challenges as before. They seek to minimize the total cost of trading including commissions, bid/ask spreads, and market impact”. And concluded that “‘Front running orders in correlated securities should be banned’ because of ‘Make or take’ pricing, the charging of access fees to market orders that ‘take’ liquidity and paying rebates to limit orders that “make” liquidity, [which] cause distortions that should be corrected”.
- 26.
Furthermore FSB. 2019. “Implementation and Effects of the G20 Financial Regulatory Reforms. 5th Annual Report” highlights that “the global financial system has continued to grow and the supply of financial services has also become more diversified, including through the expansion in NBFI and through financial technology (FinTech) innovations”.
- 27.
All the above recalls that Dhar, V. and Stein, R., 2016. “FinTech Platforms and Strategy”. “MIT Sloan Research Paper No. 5183-16” refers that “a major consequence of the Internet era is the emergence of complex ‘platforms’ that combine technology and process in new ways that often disrupt existing industry structures and blur industry boundaries”. The effects mentioned in the body of the text refer also to the evidence that “these platforms allow easy participation that often strengthens and extends network effects, while the vast amounts of data captured through such participation can increase the value of the platform to its participants, creating a virtuous cycle. While initially slow to penetrate the financial services sector, such platforms are now beginning to emerge”. It is worth highlighting that the authors provide “a taxonomy of platforms in Finance and identify the feasible strategies that are available to incumbents in the industry, innovators, and the major internet giants”.
- 28.
As highlighted before, this is a system in which a process takes place that can provide further (and additional) funding than that allowed by banking (subject to the constraints of prudential regulation); together with the possibility of increasing the resources available to meet the needs of the real economy (without undermining the global financial stability); see Lemma, V. 2016. “The Shadow Banking System. Creating Transparency in the Financial Markets”. London. p. 38.
- 29.
In particular, ECB. 2018. “Guide to assessments of licence applications. Licence applications in general” expressly clarifies that “Licensing of credit institutions is essential for the public regulation and supervision of the European financial system. Confidence in the financial system requires public awareness that banks can only be operated by entities that are licensed to do so. … At the same time, licensing should not hinder competition, financial innovation or technological progress. … This Guide applies to all licence applications to become a credit institution within the meaning of the Capital Requirements Regulation (CRR), including, but not limited to, initial authorisations for credit institutions, applications from fintech companies, authorisations in the context of mergers or acquisitions, bridge bank applications and licence extensions”.
ECB. 2018. “Guide to assessments of fintech credit institution licence applications” whose background refers to the fact that the ECB considers fintech banks to be those having “a business model in which the production and delivery of banking products and services are based on technology-enabled innovation”.
- 30.
In addition, Allen, F and Babus, A. 2008. “Networks in Finance”, “Wharton Financial Institutions Center Working Paper” No. 08-07, reviewed the recent developments in financial networks, highlighting “the synergies created from applying network theory to answer financial questions”. Further, the authors propose several directions of research, by expressly remarking the following: “First, we consider the issue of systemic risk. In this context, two questions arise: how resilient financial networks are to contagion, and how financial institutions form connections when exposed to the risk of contagion. The second issue we consider is how network theory can be used to explain freezes in the interbank market of the type we have observed in August 2007 and subsequently. The third issue is how social networks can improve investment decisions and corporate governance. Recent empirical work has provided some interesting results in this regard. The fourth issue concerns the role of networks in distributing primary issues of securities as, for example, in initial public offerings, or seasoned debt and equity issues. Finally, we consider the role of networks as a form of mutual monitoring as in microfinance.”
- 31.
See also Capriglione, F. 2019. “Fonti Normative” In Manuale di diritto bancario e finanziario, Padova; Giorgianni, F. 2005. “Definizione di attività bancaria e analisi del linguaggio” Rivista del diritto commerciale e del diritto generale delle obbligazioni, pt. 1, p. 897 ff.; Molle, G. 1978. Review at “Francesco Capriglione, Intervento pubblico e ordinamento del credito” Banca borsa e titoli di credito, 1978, p. 123.
- 32.
Once again, this analysis refers to Carney, M. 2017. “The Promise of FinTech—Something New Under the Sun? Speech given by the Bank of England Chair of the Financial Stability Board Deutsche Bundesbank G20 conference on Digitising finance, financial inclusion and financial literacy”, Wiesbaden 25 January.
- 33.
See Benzell, S. and LaGarda, G. and Van Alstyne, M. W. 2018. “The Impact of APIs in Firm Performance”. “Boston University Questrom School of Business Research Paper No. 2843326”, which—using proprietary information from a significant fraction of the API tool provision industry—explores the impact of API adoption and complementary investments on firm performance and include external as well as internal developers. The authors, in particular, represent that “Categorizing APIs by their orientation, we find that B2B, B2C, and Internal API calls are heterogeneous in their association with financial outcomes” and “the fact that API calls are associated with contemporaneous increases in firm value suggest that data flow at the boundary of the firm can predict financial performance”.
- 34.
See Baker, T. and Dellaert, B. G. C. 2018. “Regulating Robo Advice Across the Financial Services Industry” “Iowa Law Review”, p. 713; the authors highlight the potential to lower the cost and increase the quality and transparency of financial advice for consumers. However, they conclude that such tools “pose significant new challenges for regulators who are accustomed to assessing human intermediaries. A well-designed robo advisor will be honest and competent, and it will recommend only suitable products. Because humans design and implement robo advisors, however, honesty, competence, and suitability cannot simply be assumed. Moreover, robo advisors pose new scale risks that are different in kind from that involved in assessing the conduct of thousands of individual actors”. This leads the authors to questioning that regulators need to be able to answer about them, and the capacities that regulators need to develop in order to answer those questions.
- 35.
This part of the research considers also Zetzsche, D. A. and Buckley, R. P. and Arner, D. W. and Barberis, J. N., 2017. “Regulating a Revolution: From Regulatory Sandboxes to Smart Regulation” Fordham Journal of Corporate and Financial Law represented that “financial regulators are increasingly seeking to balance the traditional regulatory objectives of financial stability and consumer protection with promoting growth and innovation”.
- 36.
The above considerations may include the conclusion of Meyer, T. 2014. “From Contract to Legislation: The Logic of Modern International Lawmaking” in Chicago Journal of International Law, p. 559 ff.; the author argued that “In contractual lawmaking, states are free to expel holdouts from negotiations and make commitments among a smaller group of the willing. Moving from contract to legislation removes this freedom. … The increased holdup power created by legislatures is a feature, not a bug. This holdup power is beneficial because it allows states to enforce legislative bargains: deals in which a state makes concessions in one negotiation in exchange for another state’s concessions in a later related negotiation. Such iterative negotiations—found in free trade talks, environmental regimes, and efforts to establish a robust international criminal law—are a hallmark of modern international law-making. … This rationale for holdup power explains a number of puzzles in international law. In particular, it explains why international legislatures have not adopted robust majoritarian voting and further clarifies how international institutions enforce international law, which critics often claim is unenforceable”.
It is useful to recall Barnhizer, D. D. 2007. “Bargaining Power in Contract Theory”. “MSU Legal Studies Research Paper No. 03-04”, which analysed the role that legal conceptions of bargaining power play in defining the jurisprudence of contract law. In particular, the author highlighted that “contract law cannot ignore bargaining power asymmetries”, and from this consideration he highlighted that “unchecked power imbalances in the bargaining context soon become indistinguishable from naked coercion, and at some level the imbalance undermines both the consent of the weaker party and the legitimacy of the resulting bargain”. This helps us in recalling the debate over the role of the legal doctrine of inequality of bargaining power that has largely focused on whether and how the government should intervene in individual private agreements to correct perceived power disparities. Hence, it is worth quoting again the author: “While bargaining power disparities may be difficult to analyse in these individual cases, legal conceptions of bargaining power may also be useful in defining the boundaries of contract law. Specifically, where both parties to a transaction possess some ability to affect the outcome of that transaction, they may take advantage of the relatively flexible and unregulated regime of private contract. … At this macro level, bargaining power provides both a positive and normative explanation for why some promises are enforceable in contract and others are regulated under relatively more intrusive public orderings.”
See also Spence, D. B. and Gopalakrishnan, L. 1999. “The New Political Economy of Regulation: Looking for Positive Sum Change in a Zero Sum World”. “University of Texas at Austin, Graduate School of Business Working Paper No. 990415”; the authors argue that in the context of political conflict over policy changes, participants in these bargaining processes view positive sum policy changes in zero-sum terms. That is, they bargain strategically, using their power to veto these positive-sum changes in order to extract further policy concessions from other stakeholders. This revelation has important implications for the future of the regulatory reform concerning fintech.
- 37.
It starts from the approach published by ECB, Pinna, A. and Ruttenberg, 2016. W., “Distributed Ledger Technologies in Securities Post-Trading Revolution or Evolution?” “ECB Occasional Paper No. 172”, whose paper analyses the main features of distributed ledger technologies that could influence their potential adoption by financial institutions and discusses how the use of these technologies could affect the European post-trade market for securities. In particular, this paper discusses three potential models of how market players could adopt DLTs for performing core post-trade functions. The DLT could be adopted: (i) in clusters, (ii) collectively, or (iii) peer to peer. Indeed, according to the authors, the evaluation of the three adoption models assumes that they are all equally compatible with the regulatory framework. It shows that, assuming this to be the case, they would each have different advantages and costs.
However, this analysis will move forward and will look to the supply due to DLTs’ application, which will be considered as the output of a ‘chain’ rather than a mere ‘black box’, even if certain evidences suggest that it comes from the output of a ‘chain of black boxes’.
- 38.
Let us recall the outcome of de Weijs, R. J., 2011. “Harmonisation of European Insolvency Law and the Need to Tackle Two Common Problems: Common Pool & Anticommons”, “Centre for the Study of European Contract Law Working Paper Series No. 2011-16”; the author’s results can be considered in order to highlight that ‘anticommons’ present themselves in a situation in which there are several owners or entitled parties, and each of the parties has it within its power to block the use by others. Should anticommons behaviour in fintech chains go unchecked, creditors as a whole will be harmed. So, there is the need for understanding that this collective process may not be sabotaged by a single party.
- 39.
The text considered that Carney, M. 2017. “The Promise of FinTech—Something New Under the Sun? Speech given by the Bank of England Chair of the Financial Stability Board Deutsche Bundesbank G20 conference on Digitising finance, financial inclusion and financial literacy”, Wiesbaden 25 January pointed out that “the result has been a significant expansion of credit availability with low default rates (albeit ones not yet tested by an economic downturn)” by considering the following evidences: “In a number of G20 countries, new business models draw on big data and advanced analytics to tailor products and services to customers and discipline credit underwriting. For example, peer-to-peer (‘P2P’) lending has grown rapidly in recent years from a small base. In the UK, P2P lending now represents about 14% of the new lending to SMEs. Estimates suggest that more than half of these credits were unlikely to have been provided by existing banks. Other platforms are allowing firms to borrow against invoice receivables, drawing on data gathered directly from software their customers use to manage their accounts payable. Some of the more radical innovations underway are in emerging economies. E-commerce platforms in China, for example, are using algorithms to analyse transaction and search data to improve credit scoring.”
- 40.
See Simshaw, D. 2018. “Ethical Issues in Robo-Lawyering: The Need for Guidance on Developing and Using Artificial Intelligence in the Practice of Law”. “Hastings Law Journal”; the author noted that “Among other impacts, AI has the potential to increase access to justice in the self-help, individual, and corporate law firm markets by lowering costs and expanding services to untapped markets”.
According to the author, a prominent question in early literature on AI in law is whether these services constitute the unauthorized practice of law, and “there is currently no comprehensive guidance for attorneys on how AI should be developed, adopted, and used in ways that conform to a lawyer’s ethical obligations”.
- 41.
It recalls Posner, R. 2007. “Economic Analysis of Law”, New York, p. 419, footnote 1.
- 42.
This is remarked by Posner, R. 2007. “Economic Analysis of Law”, New York, p. 420.
- 43.
See Hughes, J. P. and Mester, L. J., 2008. “Efficiency in Banking: Theory, Practice, and Evidence”, which gives an overview of two general empirical approaches to measuring bank performance and discusses some of the applications of these approaches found in the literature.
See also Albertazzi, U. and Gambacorta, L. 2006. “Bank Profitability and the Business Cycle” Bank of Italy Economic Research Paper No. 601, which—before the last crises—studied the link between business cycle fluctuations and banking sector profitability and how this link is affected by institutional and structural characteristics. This work estimated “a set of equations for net interest income, non-interest income, operating costs, provisions, and profit before taxes, for banks in the main industrialized countries and evaluates the effects on banking profitability of shocks to both macroeconomic and financial factors”. They also identified differences in the resilience of the Euro and non-Euro banking systems and related them to the characteristics of their financial structure.
- 44.
Let us recall the classic Keyenes, J. M., 1953. “The General Theory of Employment, Interest, and Money” (San Diego, edition 1964), p. 158.
- 45.
The reference goes to Harvey, C. R. and Rattray, S. and Sinclair, A. and van Hemert, O., 2017. “Man vs. Machine: Comparing Discretionary and Systematic Hedge Fund Performance” Duke I&E Research Paper No. 2017-01; the authors analyse and contrast the performance of discretionary and systematic hedge funds starting from the evidence that systematic funds use strategies that are rules based, with little or no daily intervention by humans. They found out that “for the period 1996–2014, systematic and discretionary manager performance is similar, after adjusting for volatility and factor exposures, i.e., in terms of their appraisal ratio. It is sometimes claimed that systematic funds’ returns have a greater exposure to well-known risk factors … however, … for discretionary funds (in the aggregate) more of the average return and the volatility of returns can be explained by risk factors”.
Kakushadze, Z. and Yu, W. 2019. “Machine Learning Risk Models” Journal of Risk & Control, p. 37 ff.; the authors give an explicit algorithm and source code for constructing risk models based on machine learning techniques (in which the resultant covariance matrices are not factor models).
In this respect, Creamer, G. G. and Freund, Y. 2010. “Automated Trading with Boosting and Expert Weighting” Quantitative Finance, Vol. 4, No. 10, p. 401 ff., proposed a multi-stock automated trading system that relies on a layered structure consisting of a machine learning algorithm, an online learning utility and a risk management overlay. The authors highlighted that “One of the strengths of our approach is that the algorithm is able to select the best combination of rules derived from well-known technical analysis indicators and is also able to select the best parameters of the technical indicators”.
It has also to be recalled Golub, A. and Glattfelder, J. and Olsen, R. B., 2017. “The Alpha Engine: Designing an Automated Trading Algorithm” High Performance Computing in Finance, Chapman & Hall/CRC Series in Mathematical Finance, which proposed a new approach to algorithmic investment management that yields profitable automated trading strategies. This paper shows that a trading model design can be the result of a path of investigation that was chosen decades ago. In particular, the authors represent the following: “Back then, a paradigm change was proposed for the way time is defined in financial markets, based on intrinsic events. This definition lead to the uncovering of a large set of scaling laws. An additional guiding principle was found by embedding the trading model construction in an agent-base framework, inspired by the study of complex systems. This new approach to designing automated trading algorithms is a parsimonious method for building a new type of investment strategy that not only generates profits, but also provides liquidity to financial markets and does not have a priori restrictions on the amount of assets that are managed.”
- 46.
In this respect, it is worth considering that Yadav, Y. 2014. “How Algorithmic Trading Undermines Efficiency in Capital Markets” Vanderbilt Law Review and Vanderbilt Law and Economics Research Paper No. 14-8 argues that “the rise of algorithmic trading profoundly challenges the foundation on which much of today’s securities regulation framework rests: the understanding that securities’ prices objectively reflect available information in the market”.
In particular, the author made two claims “First, complex algorithms foster a separation between the trader and her ability to fully control the operation of the algorithm. Algorithms can execute many thousands of trades in milliseconds, crunching vast quantities of data and dynamically interacting with other traders in the process. This intelligence makes it difficult for a trader to fully predict how an algorithm might behave ex ante and near-impossible for her to track and control its activities in real-time. Secondly, though markets have traditionally relied on informed fundamental traders to decode complexity, these actors now possess reduced incentives to perform this function in algorithmic markets.”
- 47.
It should be added a reference to FSB. 2017. “Financial Stability Implications from FinTech. Supervisory and Regulatory Issues that Merit Authorities’ Attention”, 27 June, with respect to the fact that “The majority of regulatory changes and clarifications have been made in the areas of payments, capital raising, and to a lesser extent investment management as many of these economic functions naturally fit within existing regulatory regimes”.
- 48.
In particular, Ezrachi, A. 2018. “EU Competition Law Goals and the Digital Economy”. Oxford Legal Studies Research Paper No. 17/2018 goes deep into new competition dynamics in the digital economy, and raises doubts on the normative scope of competition enforcement. In brief, the competition nature of these doubts has become common in the face of new business strategies, new forms of interaction with consumers, the accumulation of data and the use of big analytics. Indeed, the author seeks to outline the goals and values advanced by European Competition law, and their application to digital markets.
- 49.
Moreover, Mittelstadt, B. and Allo, P. and Taddeo, M. and Wachter, S. and Floridi, L. 2016. “The Ethics of Algorithms: Mapping the Debate” Big Data & Society highlighted that “more and more often, algorithms mediate social processes, business transactions, governmental decisions, and how we perceive, understand, and interact among ourselves and with the environment. Gaps between the design and operation of algorithms and our understanding of their ethical implications can have severe consequences affecting individuals as well as groups and whole societies.”
- 50.
See the results of Lemma, V. and Thorp, J. A. 2014. “Sharing Corporate Governance: The Role of Outsourcing Contracts in Banking” Law and Economics Yearly Review, Vol. 3, pt. 2, p. 357 ff., with respect to a specific conclusion highlighting that the principles set by the European regulation appear to be designed to prevent that outsourcing translates into an ‘escape from responsibility’, and then that competent authorities shall make further steps towards a proper configuration of supervisory practices on outsourcing.
- 51.
Moreover, Grossman, R. and Siegel, K. 2014. “Organizational Models for Big Data and Analytics” Journal of Organization Design, p. 20 ff., introduced a framework for determining how analytics capability should be distributed within an organization. According to the interpretation of the authors, this “framework stresses the importance of building a critical mass of analytics staff, centralizing or decentralizing the analytics staff to support business processes, and establishing an analytics governance structure to ensure that analytics processes are supported by the organization as a whole”.
- 52.
See Mülbert, P. O. 2010. “Corporate Governance of Banks after the Financial Crisis—Theory, Evidence, Reforms” ECGI—Law Working Paper No. 130/2009; the author presents “the supervisors’ financial stability perspective as illustrated by the Basel Committee’s guidance, and concludes with a discussion of the functional relationship between corporate governance and banking regulation/supervision: Whereas banking regulation/supervision acts as a functional substitute for debt governance, equity governance benefits less from such regulation/intervention. Put succinctly, shareholder interests and supervisors’ interests do not run exactly parallel, not even from a long-term perspective”.
- 53.
In particular, it should be noted that FSB. 2017. “FinTech credit. Market structure, business models and financial stability implications”. Report prepared by a Working Group established by the Committee on the Global Financial System (CGFS) and the Financial Stability Board (FSB), 22 May, explains in more detail that “the nature of FinTech credit activity varies significantly across and within countries due to heterogeneity in the business models of FinTech credit platforms. Although FinTech credit markets have expanded at a fast pace over recent years, they currently remain small in size relative to credit extended by traditional intermediaries. A bigger share of FinTech-facilitated credit in the financial system could have both financial stability benefits and risks in the future, including access to alternative funding sources in the economy and efficiency pressures on incumbent banks, but also the potential for weaker lending standards and more procyclical credit provision in the economy”.
- 54.
Furthermore, EBA 2019. “The EBA 2020 Work Programme”, which anticipates that “the EBA will continue delivering its FinTech roadmap by doing further work on the monitoring of financial innovation, continuing to strengthen the network of innovation facilitators, doing thematic work on open banking and distributed ledger technology, and implementing a harmonised framework on cyber resilience testing”.
- 55.
Let us recall some relevant papers on this topic from the twentieth century in order to point out the grounds of this analysis: Giorgianni, M. (1970). “La tutela della riservatezza” Rivista trimestrale di diritto e procedura civile, 1970, fasc. 1, p. 13 ff.; Graziadei, E. 1971. “Privatezza: rimedi vecchi e offese nuove” Giurisprudenza italiana, fasc. 1, pt. 4, p. 1 ff.; Bessone, M. 1973. “Segreto della vita privata e garanzie della persona. materiali per lo studio dell’esperienza francese” Università di Genova Facoltà di giurisprudenza Annali, p. 1 ss.; Perlingieri, P. 1974. “Intervento alla tavola rotonda di bari su tecniche giuridiche e sviluppo della persona”, Diritto e giurisprudenza, fadc. 2, p. 17 ff.; Consolo, G. 1975. “Informazione, riservatezza e calcolatori elettronici. aspetti sociologici e giuridici” Amministrazione e politica, fasc. 2–3, p. 240 ff.; Ichino, P. “Diritto all’ informazione, diritto alla riservatezza, e diritto al segreto nei rapporti di lavoro” Rivista giuridica del lavoro e della previdenza sociale, 1977, fasc. 9, pt. 1, p. 541 ff.; Bevere, A. 1978. “Il caso della Banca d’Italia e la legalità del sistema economico” Critica del diritto, fasc. 15, p. 84 ff.; Martorano, F. 1978. “Convenzione di assegno e segreto bancario” Banca borsa e titoli di credito, fasc. 2, pt. 1, p. 217 ff.; Alpa, G. 1979. “Privacy e statuto dell’informazione” Rivista di diritto civile, fasc. 1, pt. 1, p. 65 ff.; Nuzzo, A. “Sul c.d. diritto alla riservatezza. Nota a pret. roma 25 gennaio 1979” Rivista di diritto industriale, 1979, fasc. 2, pt. 2, p. 25 ff.; Ferri G. B., 1981. “Privacy e identità personale. nota a Pret. Roma 30 aprile 1981. Pret. Roma 11 maggio 1981” Rivista del diritto commerciale fasc. 7-12, pt. 2, p. 379 ff.; Gambaro, A. 1981. “Falsa luce agli occhi del pubblico” Rivista di diritto civile, 1981, fasc. 1, pt. 1, p. 84 ff.; Marchetti, P. 1981. “Le offerte pubbliche di sottoscrizione e la legge 216” Rivista delle società, fasc. 6,pp. 1137 ff.; Zaccaria, R. 1982. “Diritto all’informazione e riservatezza” Il diritto delle radiodiffusioni e delle telecomunicazioni, fasc. 3, p. 527 ff.; Zeno Zencovich, V. 1983. “Telematica e tutela del diritto all’identità personale” Politica del diritto, fasc. 2, p. 345 ff.; Flick G. M., 1988. “Informazione bancaria e giudice penale: presupposti di disciplina, problemi e prospettive” Banca borsa e titoli di credito, fasc. 4-5, pt. 1, p. 441 ff.; Clarich, M. 1996. “Diritto d’accesso e tutela della riservatezza: regole sostanziali e tutela processuale” Diritto processuale amministrativo, 1996, fasc. 3, p. 430 ff.; Markesinis, B and Alpa, G. “Il diritto alla “privacy” nell’esperienza di “common law” e nell’esperienza italiana” Rivista trimestrale di diritto e procedura civile, fasc. 2, p. 417 ff.; Ubertazzi, L. C. 1997. “Riservatezza informatica ed industria culturale” AIDA, pt. 1, p. 529 ff.; Salanitro, N. 1998. “Privacy e segreto bancario”, Banca borsa e titoli di creditofasc. 2, pt. 1, p. 228 ff.; Bianca, C. M. 1999. “Tutela della privacy (l. 31 dicembre 1996, n. 675). Note introduttive (Pt. I). Commento alla l. 31 dicembre 1996, n. 675.” Le nuove leggi civili commentate, fasc. 2-3, p. 219 ff.; Stagno d’Alcontres, A. 1999. “Informazione dei soci e tutela degli azionisti di minoranza nelle società quotate” Banca borsa e titoli di credito, fasc. 3, pt. 1, p. 314 ff.
- 56.
See Chap. 4.
- 57.
All the above suggests to consider the approach of Sacco Ginevri A. 2017. “Proxy Advisors, attività riservate e conflitto di interessi” Contratto e impresa, p. 11 ff.
- 58.
See Cortina Lorente, J. J. and Schmukler, S. 2018. “The Fintech Revolution: A Threat to Global Banking?” World Bank Research and Policy Briefs No. 125038; the author’s paper highlights that “pushing digital transformation and exerting pressure on the global financial sector, their services appear to be highly complementary to the ones provided by the more established banks, which are also embracing these technologies”.
See also Grey, R. and Dharmapalan, J., 2017. “The Macroeconomic Policy Implications of Digital Fiat Currency” ‘The Case for Digital Legal Tender’ Paper Series, which articulates a vision for how widespread adoption of fintech may affect the macroeconomic levers a nation has at its disposal to steady economic growth.
- 59.
The consideration above includes a reference to Creamer, G. G. and Stolfo, S., 2009. “A Link Mining Algorithm for Earnings Forecast and Trading” Data Mining and Knowledge Discovery, which presented an algorithm that selects “the largest strongly connected component of a social network and ranks its vertices using several indicators of distance and centrality”.
See also Cave, J. 2016. “Regulation by and of Algorithms” SSRN Research Paper no. 2757701; the author pointed out the rationale of an increasing range of important decisions that are being made by algorithms, and an extensive literature that has emerged on the extent to which they can be monitored and regulated by adapting the mechanisms that have been used for human behaviour, in particular by some form of transparency.
In particular, the author represented that “at the same time, algorithms are becoming ever more central, entrusted with vital decisions and even serving on corporate Boards of Directors (thus holding delegated authority). Automated processing of data and automated decision rules operating on these data are becoming ubiquitous, and in many settings sophisticated models capable of deep learning and machine intelligence are being out-competed by faster, simpler models whose structure gives no clue as to their collective behaviour and provides neither useful insight nor effective points of control. Moreover, the interaction of developments on the compute side with those on the network side is becoming ever-more intricate”.
- 60.
See Zetzsche, D. A. and Buckley, R. P. and Arner, D. W. and Barberis, J. N., 2017. “Regulating a Revolution: From Regulatory Sandboxes to Smart Regulation” Fordham Journal of Corporate and Financial Law, which represented that “the resulting regulatory innovations include technology (RegTech), regulatory sandboxes and special charters”. This authors analyse possible new regulatory approaches “ranging from doing nothing (which spans being permissive to highly restrictive, depending on context), cautious permissiveness (on a case-by-case basis, or through special charters), structured experimentalism (such as sandboxes or piloting), and development of specific new regulatory frameworks” and then they conclude that a new regulatory approach should drive to a ‘smart regulation’.
- 61.
This remarks the conclusion of Arner, D. W. and Barberis, J. N. and Buckley, R. P., “FinTech, RegTech and the Reconceptualization of Financial Regulation”. University of Hong Kong Faculty of Law Research Paper No. 2016/035; the authors proposed new solutions to identify and address risk while also facilitating far more efficient regulatory compliance.
- 62.
After all, the history of financial innovation is littered with examples that led to early booms, growing unintended consequences and eventual busts; see Carney, M. 2017. “The Promise of FinTech—Something New Under the Sun? Speech given by the Bank of England Chair of the Financial Stability Board Deutsche Bundesbank G20 conference on Digitising finance, financial inclusion and financial literacy”, Wiesbaden 25 January.
- 63.
See Grey, R. and Dharmapalan, J., 2017. “The Macroeconomic Policy Implications of Digital Fiat Currency” ‘The Case for Digital Legal Tender’ Paper Series; and Tiwari, N. 2018. “The Commodification of Cryptocurrency” Michigan Law Review, 117(3), p. 611ff.
See also Mersch, Y. 2018. “Virtual or virtueless? The evolution of money in the digital age”, lecture at the Official Monetary and Financial Institutions Forum, London, 8 February. Szörfi, B. and Tóth, M. 2018. “Measures of slack in the euro area”, Economic Bulletin, Issue 3.
- 64.
In 1787, during the debates on adopting the U.S. Constitution, James Madison stated that “[t]he circulation of confidence is better than the circulation of money”. It’s telling that Madison chose to use public trust in money as the yardstick for trust in public institutions—money and trust are as inextricably intertwined as money and the state. Money is an “indispensable social convention” that can only work if the public trusts in its stability and acceptability and, no less importantly, if the public has confidence in the resolve of its issuing authorities to stand behind it, in bad times as well as in good.
Madison’s eighteenth-century remark on the link between money and trust has lost none of its relevance in the twenty-first century. The issue of trust in money has resurfaced in the public debate on privately issued, stateless currencies, such as bitcoin, and their promise to serve as reliable substitutes for public money.
- 65.
In this respect, please see also the approach of Keynes, J. M. 1930. “A Treatise on Money”, London, Macmillan, I, chapter 1; Hicks, J.R. 1937. “Mr. Keynes and the “classics”; a suggested interpretation”, Econometrica. Journal of the Econometric Society, 5(2), p. 147 ff.; Hansen, A.H. 1953. “A Guide to Keynes”, New York. It is worth considering the Italian approach to this topic; see Ascarelli, T. 1928. “La moneta”, Padua; Savona, P. 1974. “La sovranità monetaria”, Rome; Stammati, S. 1976. “Moneta”, Enciclopedia del Diritto, vol. XXVI, Milan; Capriglione, F. “Moneta”, Enciclopedia del Diritto, Milan, p. 747 ff.
- 66.
As ECB highlighted, private cryptocurrencies have little or no prospect of establishing themselves as viable alternatives to centrally issued money that is accepted as legal tender; see Mersch, Y. (2019), “Money and private currencies: reflections on Libra”. Speech by the Member of the Executive Board of the ECB, at the ESCB Legal Conference, Frankfurt am Main, 2 September.
See also Draghi, M. 2018. “Monetary Policy in the Euro Area”, speech at the ECB and Its Watchers XIX Conference organized by the Institute for Monetary and Financial Stability, Frankfurt, 14 March.
- 67.
Furthermore, any money follows a specific path through the economy: people spend (online and in any other places that accepts virtual currencies) or deposit it (in any virtual warehouse eligible for such a goal); see Plassaras, N. A. 2013. “Regulating Digital Currencies: Bringing Bitcoin within the Reach of the IMF” Chicago Journal of International Law, p. 377 ff.; Pozsar, Z. 2014. “Shadow Banking: The Money View”, OFR Working Paper.
See also Ricks, M. “Regulating money creation after the crisis” Harvard Business Law Review, 2011, 1, p. 75 ss. The author represented that “the (non-government) issuers of money market instruments-almost all of which are financial firms, not commercial or industrial ones-perform an invaluable economic function”.
- 68.
It refers to EBA 2019. Report on crypto-assets and to FSB. 2017. “FinTech credit. Market structure, business models and financial stability implications”. Report prepared by a Working Group established by the Committee on the Global Financial System (CGFS) and the Financial Stability Board (FSB), 22 May; and Coenen, G. et al. 2017. “Communication of monetary policy in unconventional times”, Working Paper Series, No. 2080.
- 69.
See IMF 2016. “Virtual currencies and beyond: Initial considerations”, IMF Staff Discussion Note, January 2016. See also FSB 2017. “Artificial intelligence and machine learning in financial services. Market developments and financial stability implications”, 1 November.
- 70.
It is worth recalling Zetzsche, D. A. and Buckley, R. P. and Arner, D. W., “Regulating LIBRA: The Transformative Potential of Facebook’s Cryptocurrency and Possible Regulatory Responses” European Banking Institute Working Paper Series 2019/44, which highlights that the question will be not whether, but how, to regulate these cryptocurrencies.
- 71.
It is worth recalling that the euro was initially an electronic currency used by financial markets and for cashless payments (in 1999). Indeed, three years later, euro banknotes and coins entered into circulation in the form of physical notes, with physical security features regarding their authenticity (different from cryptography), paper or centralized ledgers (for dematerialized transactions), to ensure that payments are not made to different parties using the same money and the possibility to circulate or stoke them with the traditional mechanisms; see Pellegrini, M. 2003. “Banca Centrale Nazionale e Unione Monetaria Europea. Il caso italiano”, Padova.
- 72.
Hence, the need for new rules related to this technology should be verified and, furthermore, if they shall be able to ensure that (public or private) cryptocurrencies will not put savings at risk, jeopardize the monetary policies or reduce transparency, security and efficiency (of transactions that occur in the capital market).
- 73.
It refers to the issue arising from the “social revolution” developed between 1945 and 1990; see Hobsbawm, E. 1997. “Age of Extremes. The Short Twentieth Century” (Milano, Italian edition), p. 339 ff. and to the conclusions of Pinker, S. 2018. “Enlightenment now” (Milano, Italian edition), p. 88 ff.
- 74.
The above consideration recalls FSB. 2017. “FinTech credit. Market structure, business models and financial stability implications”. Report prepared by a Working Group established by the Committee on the Global Financial System (CGFS) and the Financial Stability Board (FSB), 22 May, whose conclusion led to the consideration that “the emergence of FinTech credit markets poses challenges for policymakers in monitoring and regulating such activity”.
- 75.
In addition, EBA. 2019. “The EBA 2020 Work Programme”, whereby it is expressly provided that “the EBA will continue with its activities concerning the FinTech Knowledge Hub, in order to facilitate information and experience sharing, to raise awareness and to support the transfer of knowledge on FinTech, and to support information sharing among national innovation facilitators under the Forum of European Innovation Facilitators”.
- 76.
Furthermore Mittelstadt, B. and Allo, P. and Taddeo, M. and Wachter, S. and Floridi, L. 2016. “The Ethics of Algorithms: Mapping the Debate”; Big Data & Society contributed to clarify the ethical importance of algorithmic mediation, provided a prescriptive map to organize the debate, reviewed the current discussion of ethical aspects of algorithms, and identified areas requiring further work to develop the ethics of algorithms.
- 77.
By way of example, it is worth recalling Siclari, D. 2015. “Introduction”. “Italian Banking and Financial Law. Regulating Activities”, London; the author expressly mentions: “In the Italian regulatory system, the supervisory model, where the Bank of Italy is entrusted with the prudential supervision over credit institutions, investment firms and all other financial intermediaries to ensure the stability of the financial system while Consob is responsible for the transparency and conduct of investment services and for the disclosure of information made available by issuer, led to a potential conflict between the different objectives of the regulation and supervision. For long, in fact, primacy was given to the objective of financial stability at the expense of the objective of competition between intermediaries. This is also why those two objectives (financial stability vs. competitiveness of the financial system) were assigned by the law to the same supervisory authority. Recently, however, the Italian system of regulation has not been inclined only to the financial stability of banks but also included other purposes (competitiveness of the financial system, investors’ protection) under the impetus of the EU law to achieve protection of all public interests involved in regulating banking and finance.”
- 78.
In particular, it refers to Khan, A. A. 2016. “Changing Banking for Good: Counting the Costs of Market Misconduct”, which explored ethical dilemmas and conduct and technology-related themes in the wider arena of banking and financial services.
- 79.
Let us recall Bobbio, N. 1993. “Teoria generale del diritto”, Torino on the rights as rule of conducts, whose considerations link the freedom to a very dense network of rules of conduct, which from birth to death direct any action in this or that direction.
- 80.
See Rossano, D. 2017. “La nuova regolazione delle crisi bancarie”, Torino, in which the author—following the recent debate on the regulation of banking crisis—questions whether the objectives set by the European legislator can be pursued, and then analyses in a critical key the articulated interventionist techniques made by Directive 2014/59/EU and Regulation No. 806 of 2014 (which outline a regulatory framework that inevitably interacts with the discipline on state aid to the banking sector).
See also Binder, J. 2014. “Resolution: Concepts, Requirements and Tools” Bank Resolution: The European Regime, Oxford; the author represented that “with a harmonised ‘toolbox’ of instruments for the resolution of banking institutions, the European Bank Recovery and Resolution Directive of 2014 (Directive 2014/59/EU, ‘BRRD’) significantly widens the range of policy options available to national resolution authorities in accordance with international best practice”. Indeed, this paper analyses the “harmonised toolbox” and focuses on the relevant policy objectives, conditions and requirements for resolution, and the five resolution tools prescribed by the BRRD, (i.e., the sale of business, bridge institutions, asset separation and bail-in tools).
- 81.
In addition, it can be recalled Jagtiani, J. A. and Lemieux, C. 2017. “Fintech Lending: Financial Inclusion, Risk Pricing, and Alternative Information” FRB of Philadelphia Working Paper No. 17-17, whose considerations suggest that fintech has been playing an increasing role in shaping financial and banking landscapes. In particular, the authors represent that “banks have been concerned about the uneven playing field because fintech lenders are not subject to the same rigorous oversight. There have also been concerns about the use of alternative data sources by fintech lenders and the impact on financial inclusion”.
It refers to the use of account-level data from the Lending Club and Y-14M bank stress test data, which have been used for finding out that “Lending Club’s consumer lending activities have penetrated areas that could benefit from additional credit supply, such as areas that lose bank branches and those in highly concentrated banking markets” and “a high correlation with interest rate spreads, Lending Club rating grades, and loan performance”.
- 82.
Moreover, the conclusion of Arner, D. W. and Buckley, R. P. and Zetzsche, D. A., 2018. “Fintech for Financial Inclusion: A Framework for Digital Financial Transformation” UNSW Law Research Paper No. 18-87 represents that specific regulatory changes are a major journey for any economy, but one that increasingly suggests has tremendous potential to transform financial inclusion and support digital economic development.
- 83.
See Guild, J. 2017. “Fintech and the Future of Finance” Asian Journal of Public Affairs where the author shows that “the successful adoption of Fintech to increase financial inclusion is highly dependent on competent regulatory oversight”. He reached this conclusion by examining the adoption of Fintech services in Kenya, India and China, and he argues that “adopting a responsive regulatory approach, rather than an overly interventionist one, is the most suitable framework for boosting financial inclusion through technological innovation”.
- 84.
It is remarkable the consideration on the ‘ongoing changes’ to the current business models of fintech firms; see Engst, A. and Lemma, V. 2018. “Insurtech and interoperability of Fintech firms”, Open review of management, banking and finance, para. 2, where it is highlighted that “regulatory issues are related to the algorithms supporting the partially automated activities in insurance undertaking (and other advanced technique of risk mitigation)”.
In general, see Lagarde, C. 2019. “Transcript of International Monetary Fund Managing Director Christine Lagarde’s Opening Press Conference, 2019 Spring Meetings”, Washington D.C., 11 April.
- 85.
See Beltratti, A. and Stulz, R. M., 2009. “Why Did Some Banks Perform Better during the Credit Crisis? A Cross-Country Study of the Impact of Governance and Regulation” Fisher College of Business Working Paper No. 2009-03-012, which highlighted that “large banks with more Tier 1 capital and more deposit financing at the end of 2006 had significantly higher returns during the crisis”. See also Capriglione, F. 2018. “Considerazioni a margine del volume: il tramonto della banca universale?”, Rivista Trimestrale di Diritto dell’Economia, p. 22 ff.; Capriglione, F. 2004. “Etica della finanza mercato globalizzazione”, Bari, Chapter V.
- 86.
See Gurdgiev, C. 2016. “Is the Rise of Financial Digital Disruptors Knocking Traditional Banks Off the Track?” International Banker; the author began his analysis considering that the long-term fallout from the 2008 global financial crisis created several deep fractures in traditional-banking models. Moreover, in the view of the author, a two-pronged challenge has a disruptive potential and is a challenge that today’s traditional banking institutions are neither equipped to address nor fully enabled to grasp.
- 87.
See Panetta, F. 2018. “Fintech and banking: today and tomorrow. Speech by the Deputy Governor of the Bank of Italy”, Oxford, where the author highlights that “the progress recorded in the last few years is astonishing: for example, the amount of data exchanged internationally is now 45 times greater than in 2005, while the cost of storing information is 10 times lower than in 2010. It is against this backdrop that fintech comes into the equation”.
See McKinsey 2016. ‘Digital globalization: The new era of global flows’.
See also the conclusion reached by Engst and Lemma, Insurtech and interoperability of Fintech firms, in Open review of management, banking and finance, 2018, para. 2, on the absence of significant changes of the national legislative framework, which “should suggest a complete freedom in starting up a fintech firm that would support the business of insurance companies or distributors”.
- 88.
It refers to the conclusion of Ordonez, G. and Piguillem, F. 2019. “Retirement in the Shadow (Banking)” presented at ECB. 2019. “Fourth ECB Annual Research Conference”, 5 and 6 September.
See also Banca d’Italia 2017. “FinTech In Italia. Indagine conoscitiva sull’adozione delle innovazioni tecnologiche applicate ai servizi finanziari”, Roma; Panetta, F. 2017. “L’innovazione digitale nell’industria finanziaria italiana”, Milano.
- 89.
Let us recall again Engst and Lemma, Insurtech and interoperability of Fintech firms, in Open review of management, banking and finance, 2018, para. 2, on both the consideration that “the current legislative path for the adoption of a EU directive would not be timely for driving the innovation in this industry, anyway new rules should be able to set common standards (in order to ensure a fair competition in this market)” and the doubt “that new technologies and different business models are spreading in the insurance business, so the monitoring of outsourcing (and then the perspective of certain developments in licensing the ancillary service provided to traditional insurance companies) should allow the starting of new form of supervision without jeopardizing the market for servicing”.
- 90.
Once again, reference is made to the analysis of FSB 2017. “Artificial intelligence and machine learning in financial services. Market developments and financial stability implications”, 1 November, with respect to the risk that “Use of AI and machine learning for trading could impact the amount and degree of ‘directional’ trading. Under benign assumptions, the divergent development of trading applications by a wide range of market players could benefit financial stability”.
- 91.
The analysis may be extended to consider also Coffee, J. C., “Bail-Ins Versus Bail-Outs: Using Contingent Capital to Mitigate Systemic Risk” Columbia Law and Economics Working Paper No. 380, which shows that the Dodd-Frank Act invests heavily in preventive control and regulatory oversight, but this paper argues that the political economy of financial regulation ensures that there will be an eventual relaxation of regulatory oversight (“the regulatory sine curve”).
- 92.
In this respect, it is possible to note that Arner, D. W. and Barberis, J. N.and Buckley, R. P., 2016. “FinTech, RegTech and the Reconceptualization of Financial Regulation” “University of Hong Kong Faculty of Law Research Paper No. 2016/035” argued that “the transformative nature of technology will only be captured by a new approach that sits at the nexus between data, digital identity and regulation” and therefore exposed “the inadequacy and lack of ambition of simply digitizing analogue processes in a digital financial world” by considering that “the development of financial technology (‘FinTech’), the rapid developments in emerging markets, and the recent pro-active stance of regulators in developing regulatory sandboxes, all represent a unique combination of events, which could facilitate the transition from one regulatory model to another”.
All the above suggest to verify whether a public intervention could benefit regulators, industry and entrepreneurs in the financial sector.
- 93.
According to FSB, “many jurisdictions have amended or clarified existing rules for equity crowdfunding and for online marketplace lending, which have also been a significant focus of IOSCO”; see FSB. 2017. “Financial Stability Implications from FinTech. Supervisory and Regulatory Issues that Merit Authorities’ Attention”, 27 June. See also IOSCO. 2015. “Crowdfunding 2015 Survey Responses Report,” December.
- 94.
In addition to ECB 2018. “Guide to assessments of fintech credit institution licence applications”, let us recall Zetzsche, D. A. and Preiner, C. 2017. “Cross-Border Crowdfunding—Towards a Single Crowdfunding Market for Europe” European Banking Institute Working Paper Series with respect to “how European regulators could facilitate a Single European Crowdfunding Market while limiting both the risks for investors and the regulatory burden for crowdfunding platforms and recipients. In light of the regulatory experience with other financial products and the segregating effect of product-based approaches, many of which exist in the EU/EEA Member States, we believe existing product regulation is insufficient to enable a European cross-border crowdfunding market. Instead, regulation based on the ‘MiFID light’ framework could function as basis for a cross-border crowdfunding manager passport, given the minimum protection it affords both investors and the financial system, and the low costs it imposes on the platform”.
- 95.
In this respect, it is possible to include a reference to Allen, F and Babus, A. 2008. “Networks in Finance” Wharton Financial Institutions Center Working Paper No. 08-07; the author remarked that “by providing means to model the specifics of economic interactions, network analysis can better explain certain economic phenomena”.
- 96.
See Yadav, Y. 2014. “How Algorithmic Trading Undermines Efficiency in Capital Markets” Van-derbilt Law Review and Vanderbilt Law and Economics Research Paper No. 14-8; the author argued that algorithmic trading is transforming how markets process and interpret information, and then represented that conventional assumptions in securities law doctrine and policy also break down, in order to offer a new framework to thoroughly revaluate the centrality of efficiency economics in regulatory design.
- 97.
In particular, Zetzsche, D. A. and Arner, D. W. and Buckley, R. P. and Weber, R. H. 2019. “The Future of Data-Driven Finance and RegTech: Lessons from EU Big Bang II” European Banking Institute Working Paper Series 2019/35; the authors analyse these four pillars and suggest that together they will underpin the future of digital financial services in Europe, and—together—will drive a Big Bang transition to data-driven finance. Moreover, they conclude by arguing that “Europe’s financial services and data protection regulatory reforms have unintentionally driven the use of regulatory technologies (RegTech) by intermediaries, supervisors and regulators, thereby laying the foundations for the digital transformation of both EU financial services and financial regulation. The experiences of Europe in this process provide insights for other societies in developing regulatory approaches to the intersection of data, finance and technology”.
- 98.
See also Barbagallo, C. 2019. “Fintech and the future of financial services. Speech by Director General for Financial Supervision and Regulation Bank of Italy” who shows that “the licencing process affords the Bank of Italy unique insight into Fintech developments. Licencing is when the push for innovation—arising from the market—first meets the need to protect public interest—in the remit of the supervisor. The licencing function represents, in a nutshell, the entry point for innovative projects that might give rise to new financial players or lead to new products and services for customers”.
- 99.
On this point, see Australian Securities and Investment Commission 2017. “Regulatory Guide 257: Testing FinTech Products and Services Without Holding an AFS or Credit License”.
- 100.
Chapter 7 will go deep into this topic. However, it is worth anticipating that policymakers are called to develop regtech and suptech, in order to satisfy the needs of market participants; see Tsang, C., 2019. “From Industry Sandbox to Supervisory Control Box: Rethinking the Role of Regulators in the Era of FinTech” Journal of Law, Technology and Policy.
- 101.
See Buchanan, B. and Cao, C., 2018. “Quo Vadis?: A Comparison of the Fintech Revolution in China and the West” SWIFT Institute Working Paper No. 2017-002; the authors show that “China’s Fintech success derives not just from a technological advantage and unprecedented innovation, but also from integrating finance and real-life needs”, so this paper links “differences in the Chinese and Western Fintech sectors to variations in legal, political and cultural regimes”.
- 102.
Obviously, the text refers only to platforms that do not act as an agent, broker or intermediary that falls within the scope of the well-known legal reserves.
- 103.
See Packin, N. G., 2017. “Regtech, Compliance and Technology Judgment Rule” Chicago-Kent Law Review; the author shows that “RegTech is not a panacea for all corporate governance challenges”, by considering the following reasons: “First, there are certain barriers to the adoption of RegTech. Second, RegTech alone cannot extirpate undesired and unethical business practices, or resolve ethical issues resulting from corporate culture. Moreover, technology can be used by businesses to evade regulations and frustrate regulators, a phenomenon referred to as anti-RegTech. Third, technology can hinder good judgement and human input in the governance and risk management decision processes, which operate based on opaque programmed reasoning that is often biased and reflects altered interpretations of the law. Fourth, given the high stakes, financial institutions must be careful when partnering with third party firms, and include regulators in the conversation before entering into such partnerships, especially given the increasing cyber risks. Lastly, many of the RegTech’s automation and efficiency gains have been offset by the costs of expanded regulatory requirements, such as the increasing number of information requests from regulators”.
See also Pasquale, F. A., 2019. “A Rule of Persons, Not Machines: The Limits of Legal Automation” George Washington Law Review for a critique to the “technophiles [that] promote substituting computer code for contracts and descriptions of facts now written by humans”.
- 104.
In particular, Nabilou, H., 2019. “Central Bank Digital Currencies: Preliminary Legal Observations”. Journal of Banking Regulation shows that central banks have been investigating and experimenting with issuing central bank digital currency.
- 105.
The will to deal with the various problems raised by the non-sovereign cryptocurrencies should support the application of the cryptography’s innovation to the money issuing activity of central banks. This would imply the possibility to promote new systems of payment, whose exchange could benefit distributed ledgers, blockchain, cryptography and other tools developed in recent years.
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Lemma, V. (2020). General Observations. In: FinTech Regulation. Palgrave Macmillan, Cham. https://doi.org/10.1007/978-3-030-42347-6_2
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